Foreign direct investments in Poland since 1989
Theoretical background, specific advantages and recent developments

von: Michael A. Braun

Table of contents

List of abbreviations III [only in downloadfile]
List of tables III [only in downloadfile]

1 Introduction and academic method 1

2 Theoretical background 3

2.1 Foreign direct investments 3
2.2 Paradigm of ownership, location and internalisation 3
2.3 Traditional theories of foreign direct investments 4

2.3.1 Capital arbitrage theory 4

2.4 Modern theories of foreign direct investments 4

2.4.1 Product-cycle model 4
2.4.2 Hymerian view 5
2.4.3 Internalisation theories 5
2.4.4 Eclectic theory 5

2.5 Political risk 5

2.5.1 Types of political risk 5
2.5.2 Obsolescing bargain model 6

2.6 Conclusion of the theoretical part 7

3 Foreign direct investment location Poland 8

3.1 Economic status 8
3.2 Reasons for foreign direct investments in Poland 8

3.2.1 General method to asses a location 8
3.2.2 Application of the OLI on Poland 9

3.3 Flows of foreign direct investments into Poland 9
3.4 Effects of foreign direct investments 10

3.4.1 On the source country 10
3.4.2 On the host country 11

4 Conclusion 12

Appendixes

Tables IV

List of references V
 

1 Introduction and academic method

The collapse of communism has started a dramatic change in the economies and societies of eastern and central Europe (ECE). The transformation from a pre-planned to a market-economic system has lead to the opening of previously shut markets. Since 1989 this region is not only a new market to sell to, but also a place to produce. And especially western-European enterprises might benefit form this due to short distances, which help to integrate these locations into a worldwide firm-strategy.
European companies now have got the same possibilities like the US or even Japan to produce cheaper directly at their doorstep. However, the integration of ECE does not simply mean the extension of western markets to a eastern location. There is much more such as the complete restructuring of western production chains. Or in other words, there is a dual process of transformation (east) and structural change (west). Therefore companies now have to ask themselves how to participate and benefit from this challenge: Corporate investors face several options for expanding onto foreign markets. There are such possibilities like exporting to these regions, licensing to local partners, strategic alliances and joint ventures. But for several economic reasons, as outlined in the next chapter, foreign direct investments (FDI) seem to be one of the most common ways to go. But businesses also see, depending on contracts, the reduction of their own risk towards shared risk as a reasonable argument. Companies therefore are able to share their individual advantages and can concentrate on them. And this is done quite often within recent history. [Deutsche Bank 2003, pp8] In general it is interesting to look at the geographical spread of FDI streams. [Piggott 1999, pp258 / Deutsche Bank 2003, pp12] The majority of these kinds of investments comes out of and also goes into the western hemisphere, but also to the south-eastern parts of Asia. To a smaller extent FDI flows towards Latin America and the Caribbean. Africa is nearly not relevant when it comes to FDI transfers. Moreover, the DC are not only responsible for most of the FDI, they are also investing it mostly in there own rows. Also differences in sectors are various. Within DC services and high-tech products dominate. While in LDC especially natural resources are involved. Baring that in mind, this report focuses on Poland and its FDI inflows since 1989. Therefore three questions can be asked now to concentrate on: (1) Why do companies invest in general in foreign areas? (2) Why received this specific country capital from international investors? And (3) finally, to what extent and in which sectors have foreign investors invested? Or, spoken more generally, this report will try to answer, what the reasons are to invest in foreign countries and in particular why in Poland. Thus all underlying research on this topic was done by the review of current literature and the application of generally used economic theories. However, critical thinking in combination with the use of common sense helped, too.
For a clear understanding, there will be two main chapters. One, which deals with the theoretical background of FDI and political risk. Therefore some traditional and modern theories of FDI will be looked at more in depth. This is done basically from the company’s point of view (microeconomic perspective), rather than host country’s (macroeconomic perspective) one. However, the widely used concept (or paradigm) of ownership, location and internalisation (OLI) is applied to the whole report. And as a second major part of this chapter, the influence of political risk is assessed. For this reason, the obsolescing barging model will be explained.
The other main chapter links these two parts with the FDI-region Poland. Thus, several authors argue, Poland is worth to invest in. This statement has to be looked at more in depth to answer the underlying questions of this report. Therefore this chapter is going to have a close look on specific reasons to invest in Poland. But also the FDI- situation in Poland is part of the assessment. And in this chapter there are also figures provided on the Polish FDI-inflows since 1989.
FDI not always creates additional – obvious - value, apart from employment, for the host country. But often there are advantages of letting money into the country. For example the development from being a LDC towards a DC. This means the host country gains from specific advantages that come from outside (FDI investor). This topic will be looked at shortly as well. Moreover, afterwards a conclusion of the main findings combined with personal evaluations will be provided.

2 Theoretical background

2.1 Foreign direct investments

It seems that there is no general valid definition of FDI. But Piggott [1999, p255] define it ‘as the acquisition, establishment, or increase in production facilities by a firm in a foreign country.’ This means it has to be distinguished clearly to the sole creditmove of portfolio investment (PI). Whilst this means transfers to make profit, FDI as a production capital, a credit or even a mixed move of both is seeking for ownership and control over activities. But the process is more complex: it often does include not only financial involvement but also access to know-how and use of organisational and managerial abilities.
For a clear distinction FDI has to be divided into three parts: (1) Inflows, (2) outflows and (3) stock. The first one describes the amount of FDI received while the next means FDI, that went off the country. And finally stock is the total amount of all inward FDI undertaken yet. Since this report concentrates on FDI inflows, more comments can be made on this area: The certain country also has to be open in both ways – inward and outward - for capital flows. But its economy also should be attractive in general. [Zukrowska 2002, pp2]
Generally investor’s reasons to do FDI are easily to understand. Often there is the argument investors want to gain form lower labour cost in foreign countries. But this is not always the case as FDI are undertaken mostly in DC. Also the share of labour cost compared to total cost declined over the last 50 years. [Piggott 1999, pp258 / Deutsche Bank 2003, pp12] But the cost for raw material, transport and power seem to be one key factor for investors. Therefore it can be regarded as more important, that high productivity, available knowledge and developed infrastructure are the stronger reasons for a investment-decision. Also access to resources, either human or natural, and local markets might be an argument. Moreover the overcome of barriers of entry and the diversification of the investing firm have to be taken into account as well. And a further explanation for FDI rather than another option are expected economies of scale. This means the average cost of production has an tendency to fall with an increase in size. Especially international specialisation can lead to dropping average costs through efficient resource allocation.

2.2 Paradigm of ownership, location and internalisation

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